Private Equity Investors Push Fees to Record Lows

Investors in private equity funds are wielding their influence in negotiations with fund managers to push management fees to record lows, according to figures from Preqin.

Firms raising funds in 2013 and those still seeking capital are charging investors an average of 1.9% of the fund’s total value in annual management fees, the lowest figure since records began in 2005.

Management fees have historically been about 2%: they stood at 1.99%-2% between 2005 and 2008 and dropped to about 1.94% from 2009 until 2012.

At the same time, transaction fees, which buyout firms charge portfolio companies, are increasingly being paid back into the fund rather than to the fund manager. Funds raised or on the road in 2013 returned 87% of transaction fees to investors in buyout funds on average. This was the highest proportion returned to investors since records began in 2006.

Helen Steers, a partner at investor Pantheon, said: “The industry has become more institutionalised and the trend of fees coming down is part of that. There will continue to be a trend in that direction and people need to gear up for that.”

Investors are also bypassing fund negotiations to set up separate accounts with individual managers. This typically enables investors to pay lower fees.

The amount of capital awarded to separately managed accounts by investors climbed to a record high of $20 billion for 73 accounts in 2013, compared with $17 billion for 61 accounts in 2012 and just $1 billion for eight accounts in 2003.